Shriveled BlackBerry Has Canada Needing Research Driver

By Greg Quinn -
Oct 4, 2013

Robert Baker can’t wait to finish his
electrical engineering degree at the University of Waterloo and
get away from the withering Canadian technology company down the
street that used to draw the top students -- BlackBerry Ltd. (BB)

Joining BlackBerry after graduation “was always a dream
job,” said Baker, 21, munching on a bag of carrots at the
engineering school about 70 miles (112 kilometers) southwest of
Toronto. “Not so much anymore,” he said, adding he plans to
head to California after graduation.

Canada’s reputation as a technology innovator was
diminished after the smartphone maker announced last month a
surprise $934 million pretax writedown for unsold phones, and
said it would fire 4,500 workers -- almost 40 percent of its
employees. The world’s 11th-largest economy is already short on
research drivers like Nortel Networks Corp., which filed for
bankruptcy and was broken up and sold in parts to foreign tech
companies. BlackBerry’s current woes may further crimp spending
budgets that haven’t returned to levels of a decade ago.

BlackBerry accounts for “a big chunk of what remains of
total research and development spending in that information
technology industry,” said Michael Burt, director of industrial
economic trends at the Conference Board of Canada in Ottawa.
Losing the company “would certainly curtail productivity growth
in that particular industry and it’s possible it may have a
larger net effect on total productivity in Canada.”

Big Spender

The company formerly known as Research In Motion Ltd. is
Canada’s biggest spender on research and development over the
past 12 months at C$1.49 billion ($1.44 billion), according to
data compiled by Bloomberg, more than four times the amount of
the second-place company, Montreal-based Bombardier Inc. Without
BlackBerry, Canada wouldn’t have a company among the world’s top
300 R&D spenders on research and development. The firm said
Sept. 27 it cut such spending in the first six months of its
fiscal year by 2 percent from a year earlier, to $718 million.

“During this transition period, we are refocusing our
business to ensure we have the right investments and resources
in the right places so that we continue to innovate and stay
competitive,” the company said in an e-mail in response to a
question about whether its research budget would be cut more.

Canada’s technology companies outperformed the rest of the
economy since 2007 by largely escaping the 2009 recession. The
industry has accounted for 7.5 percent of Canadian output growth
since 2007, and its employees earn 50 percent more than the
economy-wide average wage, according to Industry Canada data.

Novel Products

Canada will rely on these types of companies “to conjure
up new products and services, to find novel uses for existing
products and to develop new markets,” according to a 2011 panel
report on business innovation for the government that was led by
Tom Jenkins, chairman of Open Text Corp., a business software
company based in Waterloo that draws its name from a text-search
technology developed through a University of Waterloo project.
“These fruits of innovation are the tools that will ensure
Canada’s success in the twenty-first century.”

Economic expansion has slowed since late 2011, hobbled by
weak global demand for the country’s exports. Bank of Canada
Senior Deputy Governor Tiff Macklem cut the bank’s growth
forecast for the rest of the year earlier this week, and said a
rotation of growth toward investment and exports has proved
“elusive.”

For policy makers like Macklem and Finance Minister Jim Flaherty, BlackBerry is a company that had been doing all the
right things -- spending on innovation and focusing on faster-growing emerging markets like Indonesia and Brazil. Even there,
sales have soured. Revenue from Latin America plunged 62 percent
last quarter from a year earlier, and sales in the Asia-Pacific
region tumbled 28 percent.

Obama’s CrackBerry

In its prime, BlackBerry produced a smartphone so cool and
addictive it was nicknamed the “CrackBerry,” with high-profile
devotees like U.S. President Barack Obama. Its stock peaked at
$147.55 in June 2008. The company created high-paying jobs in
Waterloo, where almost 9 percent of the city’s adult population
earned C$100,000 or more in 2010, more than triple the country’s
median income.

BlackBerry’s hometown, Waterloo, has a population of just
under 100,000. The city and surrounding region has grown 15
percent in the past 10 years according to Statistics Canada,
faster than the country’s 11 percent growth. Employment has
risen 10.6 percent since the end of the recession, compared with
a national average of 5.7 percent.

Going Private

Now, Fairfax Financial Holdings Ltd., BlackBerry’s largest
shareholder, has made a tentative offer to buy the company for
$4.7 billion, or $9 a share, and take it private. Fairfax, led
by Chief Executive Officer Prem Watsa, has not disclosed the
names of any of its partners in the bidding consortium, and
hadn’t secured financing for the deal at the time it was
announced Sept. 23.

BlackBerry shares were down 0.5 percent to $7.69 at 4 p.m.
in New York, more than a dollar below the offer price,
reflecting investor concerns the deal may not get done.

“It is a Canadian icon and that is what makes it more
difficult for people,” said Eric Hoskins, Ontario’s economic
development minister. “It’s pretty difficult to create a
BlackBerry.”

Waterloo and its sister city Kitchener lie in the rolling
farmlands of southwest Ontario, part of a region known as the
Golden Horseshoe, a reference to the circular shoreline of Lake
Ontario. The area has been known for its agriculture, its auto
plants, and more recently, its technology. Besides BlackBerry,
the city is home to Open Text (OTC), which has seen its stock gain 38
percent this year in Toronto trading, and Descartes Systems (DSG)
Group Inc., which is up 28 percent. BlackBerry shares are down
35 percent in New York.

Startup Hopes

Over a foosball table in the engineering school’s non-profit snack bar, across a parking lot and over a chain-link
fence from BlackBerry headquarters, students Stephen Arsenault
and Nikhil Ramakrishnan agree BlackBerry is down, and say they
hope that other Waterloo startups can sustain the region’s
industry.

“It wasn’t where I bet all my eggs on,” said Arsenault, a
second year computer engineer who wanted to work for BlackBerry
for his first co-op work term and took an offer from another
company instead. “BlackBerry has been going downhill for a
while.”

BlackBerry workers may find jobs at other smaller
technology companies that have sprung up, said Daniel Schwanen,
a researcher at the C.D. Howe Institute, a Toronto-based
research organization that says it promotes “economically sound
public policies.”

Migrating Talent

“The talent isn’t necessarily leaving Canada; in fact,
most of it is staying,” Schwanen said in a telephone interview.
“Let the talent migrate to other opportunities.”

One opportunity is Industry Corp., which is developing
video games including ones featuring Steven Jackson of the
National Football League’s Atlanta Falcons and Hanley Ramirez of
the Los Angeles Dodgers baseball team.

“We always want to be going for the next cool thing, so I
think in five years we will be certainly a name brand in the
entertainment industry,” said Andrew Matlock, 26, CEO of the
company that has 15 people on staff.

Industry Corp. was helped by using space in the Communitech
Corp. technology startup incubator, which is housed in an old
Kitchener tannery that also includes offices of Google Inc. and
Desire2Learn Inc., an 850-employee maker of educational
software. Iain Klugman, the site’s CEO, said the companies that
have sprung up around BlackBerry are enough for a sustainable
industry to hire many fired workers.

Next Wave

“You can’t drive down the street without seeing a
university building or a research institute or a hospital wing
that hasn’t felt the impact of BlackBerry,” Klugman said. “It
really was dominant here for a chunk of our history in the
mid-2000s, but what happened is there’s a whole next wave of
entrepreneurs that came behind.”

While Canada waits for the next BlackBerry or Nortel to
emerge, the economy feels the impact of BlackBerry’s woes.

“When you lose a company like that that’s a global player
on a global stage, that’s really a black eye,” said Startup
Canada Chairman Adam Chowaniec, a former Nortel engineer and
founding CEO of Tundra Semiconductor Corp. “The repercussions
are much bigger than just the job numbers themselves, it really
is a hollowing out of our ability to compete globally in
technology.”